The easy gains in economic growth caused by reopening are in the rearview mirror for developed economies, but strong demand, coupled with supply problems, are “going to take some time to stabilize” in 2022. That’s the view of investment giant Vanguard, which said in their economic outlook that macroeconomic policy would become a more powerful force than Covid-19 as business activity plays out this year.

After a spectacular run-up in U.S. growth and technology stocks over the last decade, investors are going to need the investment characteristics displayed in value and international stocks, said Andrew Patterson, senior economist at Vanguard.

In particular, Vanguard favors equities in non-U.S. developed markets. “The non-U.S. developed market story is one of valuation, [sector] composition and dividend yield,” Patterson said.

Vanguard expects growth in the U.S. and Euro area to decline to the 4% area, which remains far ahead of the pace of the past two decades. For several years, students of value investing have argued that above-average economic growth is needed for value stocks to perform well.

Vanguard’s 10-year projections call for U.S. equities as a whole to return a median of about 3.3% annually. However, the median forecast for U.S. growth stocks is a paltry 0.1% a year. Its estimated 10-year annualized median return for U.S. value stocks in 4.1%.

In contrast, the picture is brighter abroad. The investment complex sees unhedged, non-U.S. global equities returning 6.2% a year.

Vanguard is more circumspect when it comes to emerging markets, an area favored by many high-profile value investors like Jeremy Grantham and Rob Arnott. “Emerging market valuations are tied to policy changes in individual countries,” Patterson said.

A return to 1970s-style inflation “is not in the cards,” Vanguard said, but the mutual fund-ETF complex expects prices to remain elevated this year. The clash between pent-up demand that developed during the pandemic and supply reductions is likely to reverberate throughout the economy for the remainder of the year, the firm said.

“Predictions about the business cycle” are very challenging, Patterson maintained. The current cycle is more unusual than previous ones, given that the 2020 recession was man-made.

Other factors have emerged in the wake of a global public health crisis. “The Fed is starting to think that we aren’t returning to pre-pandemic [labor force] participation rates,” Patterson explained.

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